World Business History Conference, Frankfurt, 17 March 2014

From nation-based to global competition in the watch industry

(1950-2010)Pierre-Yves Donz (Kyoto University)

Work in progress dont quote without permission

IntroductionLiterature in business history offers two main interpretations for tackling the issue of sourcesof competitiveness. On the one hand, there is big business, whose resources andorganizational facilities make it a key actor in the world economy, as has been emphasized byChandler and his followers.1 On the other hand, there is the perspective of industrial districtsand clusters, which attaches greater importance to resources anchored in a region and toterritorial economies.2 However, there are also works which tend to transcend this opposition,one of the first being Porters Competitive Advantage of Nations, which underscored that thecompetitiveness of multinational enterprises (MNEs) is also related to their localization inspecific clusters and nations.3 Moreover, since the mid-1990s, several scholars working onindustrial districts have researched the role of leading firms and MNEs within districts, and

their role on overall regional dynamics.4 In addition, other scholars stress the importance ofgeographically localized resources for MNEs.5 The objective of this paper is to contribute tothis discussion on the importance of localized resources for the competitiveness of firms, aswell as on the concept of national industry, using the case of the watch industry during theyears 1945-2010 and focusing on the four main players (Switzerland, Japan, USA and HongKong).According to most scholars, the watch industry is a typical case where competition has beenand still is based on nations and regions rather than enterprise, a strong focus having beenplaced on the struggle between the Swiss watch industry and its Japanese or even Asian rivals. The association of Hong Kong and Japanese watchmakers as firms specialized in theproduction of cheap quartz watches, in comparison with the Swiss, is a common view sharedby the majority of Western scholars. Indeed, many of them make no distinction when referringto Asian manufacturers.6 For example, Tajeddini and Trueman maintain that the Swisswatch industry had been almost completely driven out of the low and mid-range sector of themarket by low-cost, highly accurate quartz watches made in Hong Kong and Japan.7 Yeteven if competition in this industry was mainly based on nations back in the 1950s, this paperargues that major changes occurred in the following decades and resulted in a sweepingchange towards competition between global firms. Accordingly, this paper analyses the natureand the process of these changes and questions the current meaning of nations, regions andlocalization in the industry.

The choice of sources to tackle competitiveness in the watch industry is not neutral andgreatly influences the output of the analysis. Two main kinds of data are available to scholars:foreign trade and production statistics for the various countries involved in this industry, andthe ranking of the worlds leading watch companies.First, the use of statistics sheds clear light on competition between the main watchmakingnations of the world between 1950 and 2010 (see figure 1). This source makes it possible toidentify three phases of development. First, the years 1950-1975 featured great stability, withthe United States being the leading producing country but nearly absent from the worldmarket (its exports amounted to a paltry 1.8% of production between 1950 and 1973) and thusnot very competitive. Switzerland and Japan experienced steady growth and began to competehead on in the late 1960s. As for Hong Kong, its presence on the world market was stillinsignificant.Second, the years 1975-1985 were a decade of deep upheaval, against the backdrop of theemergence of electronic watches. Whereas Switzerland was in stagnation, the Americanwatch and clock industry entered a period of gradual decline which was to continue until 2010.This period marked the triumph of East Asia, with Japan establishing itself as the No. 1producing and exporting nation, and of Hong Kong, which made a noteworthy entry on thismarket.Third, the years 1985-2010 were devoted to the restructuring of international competitiveness,as reflected by the successful comeback of Switzerland, which repositioned its watch industrytowards luxury, and the remarkable growth of Hong Kong, no longer as a basis for production(which collapsed in 1990) but for the re-export of watch products to neighboring China,where Hong Kongs entrepreneurs located their plants. As for the US, it continued to slide, asdid Japan, which started to go under.Figure 1: Production and export of watches and clocks, in millions of USD, 1950-2010

Export and production statistics thus make it possible to highlight overall trends for the worldwatch industry and to differentiate between the development paths of different nations. Yetthese data give an inaccurate overview, which only partially reflects the way in whichcompetitiveness in this industry has actually evolved. This is because they were compiled bynational authorities focusing on nation-based issues, as a result of which they offer a nationalvision of competitiveness. Using other sources gives a fundamentally different view.

The global ranking of the largest watch enterprises is another way to approachcompetitiveness in the industry. Owing to a lack of data for numerous enterprises not listed especially in Switzerland it is not possible to arrive at exact figures. In any case, someinvestment banks have compiled such rankings based on their own estimates. This paper usesthe ranking of watch companies established by the bank Vontobel, the most widely used bywatch industry analysts. Table 1 shows the worlds 20 largest watch companies, giving theproduction sites for their products. Two main features can be highlighted. First, this rankingshows that a very large share of manufacturing is in the hands of a very few firms. The top 20companies have a combined 78.4% share of world markets, while the three largest havenearly half (45.8%).Second, there is wide geographical diversity of firms. Most are headquartered in Switzerland(9), Japan (3) or the United States (2), but some are also based in countries where the watchindustry is not particularly flourishing, like France (2), Italy (1), Spain (1) and Greece (1).What is more, only one firm is based in Hong Kong, whereas this city has become one of theleading watch exporters. Accordingly, a significant distinction may be made betweenproducing and exporting nations, on the one hand (figure 1), and the nationality of the worldslargest watch companies, on the other hand (table 1). This can be explained by the fact thatmost of the watch companies do not produce their own parts in-house, but rather source theirsupplies from other companies. Among the top 20, those companies which produce their ownwatches are in a minority: Swatch Group, a few Swiss companies specialized in luxury goods(Rolex, Patek Philippe, Audemars Piguet, as well as some of the companies held by theRichemont, LVMH and Kering groups, but only for some specific products) and the threeJapanese watchmakers. All of the other companies in the top 20 distribute and sometimesassemble watches bought from Swiss, Japanese and Hong Kong watchmakers.Competitiveness no longer relies on the mastery of production technology, but rather on theability to make effective use of global supply chains, as can also be seen today in other5

This difference between production sites and the main players explains the presence withinthe top 20 of watch companies established in countries with a watchmaking industry which isapparently not competitive in terms of export data. The case of the United States and Fossil isundoubtedly one of the most revealing (see figure 2). This Texas-based American companywas founded in 1984.9 Even though the US has a long and rich history of watchmaking,Fossil does not have not a single link to American know-how in this field or to former watchproducers. Since its foundation, it has sourced its supplies from watch companies in HongKong, where it opened a subsidiary in 1992, Fossil (East) Ltd., and in Switzerland, where itopened another subsidiary in 2001 (Swiss Technology Holding) in order to secure its supplyof Swiss Made watches for its luxury brands. Fossil develops and distributes watches for itsown brands (Fossil, Zodiac) and for partners from the fashion business (Burberry, Diesel,DKNY, Emporio Armani, etc.). Since the mid-1990s it has experienced breathtakingly fastgrowth, with gross sales reaching USD 362 million in 2000 and 1.4 billion in 2010, becomingthe worlds fourth largest watch company in 2012. Yet despite this success, American watchand clock production has collapsed, plummeting from USD 1.2 billion USD in 2000 to 334million in 2010. Consequently, even though the US has one of the largest watch companies inthe world, it was unable to prevent the decline of its own watch industry.

Figure 2: American watch and clock production and gross watch sales for Fossil Co., in9

The fundamental distinction between production sites and the nationality of the mostcompetitive companies, which can be seen in the global watch industry at the beginning of the21st century, is the outcome of a particular historical development. Indeed, this industry waslargely organized on a national basis at the end of World War II. In the following sections, thisarticle offers an analysis of the dynamics of this industry between the 1950s and 2010, with aview to identifying those factors which led to a radical change in the basis for competition.

1. The global watch industry in the 1950s

At the end of World War II, the global watch industry was, broadly speaking, structured alongnational lines. The volume of Swiss production for the 1950s amounted to nearly half of thetotal, while the top five nations taken together represented more than 80%. However, the8

figures published in table 2 are for production volume and thus do not accurately reflect thecompetitiveness of each nation, due to the large variety of products, with some countries likethe US specializing in the production of inexpensive, low-quality mechanical watches (calledpin-lever watches or Roskopf watches); others like Japan opting for quality watches; andEuropean countries, Switzerland included, producing both kinds of watches. Nevertheless, thekey point highlighted by this table is the high concentration of production in a small numberof countries, where this business was considered to be a national industry at the time. Thenational roots of watchmaking are essentially due to institutional factors.

Table 2: World production of watches and watch movements, millions of units and %,1950-1959Millions ofunits

Switzerland

348.4

48.2

USA

92.4

12.8

USSR

84.1

11.6

France

39.6

5.5

Japan

24.7

3.4

Other

134.1

18.5

World

723.3

100

Source: Estimates of the Federation of the Swiss Watch Industry published by Landes David S., Revolution inTime: Clocks and the Making of the Modern World, Cambridge: Harvard University Press, 2000 (second edition),p. 423.

At first, as far as Switzerland was concerned, the national character of the watch industry wasa direct consequence of the cartel set up in the 1920s and recognized by the federalgovernment in 1934. 10 Within this system, all enterprises involved in watchmaking in10

Switzerland were obliged to source their supplies of parts exclusively from other Swissenterprises at price conditions defined by the cartel. The import of parts was strictly forbidden,except for a few French and German enterprises which had long-standing business relationswith Swiss watchmakers. In addition, exports of parts and machine tools were strictlycontrolled, preventing Swiss watch companies from relocating their production abroad.Finally, the establishment and purchase of watch companies were subject to officialauthorization. This system, set up in order to maintain an industrial structure composed ofsmall and medium-sized enterprises (SMEs), explains the national character of the Swisswatch industry in the 1950s. While Swiss watchmakers did not invest abroad, except for salessubsidiaries, unlike most of the Swiss entrepreneurs of other sectors which organized globallyearly on,11 inward foreign direct investment (FDI) was extremely rare. The very few watchcompanies with foreign capital were subsidiaries of American watch companies, establishedin Switzerland to secure their supplies of parts and movements and founded beforecartelization, such as Gruen Watch (1903), Bulova Watch (1911) and Benrus Watch (1927).12However, these enterprises represented only a tiny share of the Swiss watch industry, whichnumbered 1863 companies in 1950. 13 Back in the 1940s, these American subsidiariesobtained special, secret authorization to export some parts to their headquarters in the UnitedStates.14In the United States, the national character of the watch industry was the twofold consequenceof an oligopolistic structure15 and of custom protectionism. The American watch industry

in the 1950s was essentially limited to three companies: Bulova, Hamilton and Timex. Thesefirms benefited from growing custom protectionism from the interwar years onwards, whichbecame more pronounced in the 1950s. After World War II, the strategic importance of thewatch industry on military grounds led to State backing. For example, Hamilton was veryactive in the production of war material during the Korean War.16 As for Bulova, it appointedformer General Omar Bradley as Chairman of its Board of Directors in 1958.17 As a result ofthis State support and protectionism, American watch companies were not very interested inforeign outlets: exports amounted to a paltry 1.3% of domestic production in 1960.18 Theonly exception to this national character of the American watch industry was the companyUnited States Time Co. (Timex),19 which was founded in 1941 to produce war material andwhich focused on the mass production of low-quality mechanical watches after the war. At theend of the 1950s, it adopted an active strategy of outward FDI and began to transferproduction facilities abroad, stepping up the pace over the following decade.The case of Japan was similar to that of America, even if the products were different. TheJapanese watch industry was highly concentrated: the two groups Hattori & Co. (brand Seiko)and Citizen Watch production accounted respectively for 51.4% and 31.8% of national watchproduction in 1960 (volume).20 Moreover, these two companies had all their productionfacilities on Japanese territory, and there were no watch companies with foreign capital inJapan. In addition, Japanese watch companies benefited from custom protectionism duringthis period, with imports being subject to quotas until 1961. As a result, the domestic marketwas the main outlet for this industry, which exported only 2% of its production in 1960.2116

Glasmeier, Manufacturing Time, p. 184.

Bulova Corporation, International Directory of Company Histories, Vol. 41, Detroit Mich. [etc.]: St. JamesPress, 2001, pp. 70-72.18Own calculation on the basis of U.S. Commodity Exports and Imports, Washington: U.S. Census Bureau,1960 and Annual Survey of Manufactures, Washington: U.S. Bureau of Census, 1960.19Timex, International Directory of Company Histories, Vol. 25, Detroit Mich. [etc.]: St. James Press, 1999,pp. 479482.20Own calculation on the basis of Kikai tokei nenpou, Tokyo: MITI, 1960 and production statistics provided byHattori & Co. and Citizen Watch.21Own calculation on the basis of Kikai tokei nenpou, Tokyo: MITI, 1960 and Nihon gaikoku boeki nenpyo,Tokyo: Ministry of Finance, 1960.17

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However, the main differences with the United States were the absence of production of warmaterial and the existence of cooperation and joint research between private companies, Stateagencies and universities.22 This was instrumental in strengthening the feeling of a nationalindustry developing to compete with other nations.Accordingly, this quick overview has made it possible to highlight the existence of watchindustries in several countries. Their national character was the consequence of a virtualabsence of FDI and of custom protectionism, which safeguarded the domestic market fordomestic companies. The State was a major player in maintaining such a structure, either onmilitary grounds (USA), or to support employment (Switzerland) and industrial development(Japan).

2. The first wave of FDI and its effects (1960s)

The organization of a deeply nation-based industry was challenged in the 1960s byinstitutional and technological factors, which broke down national borders and led to the firstphase in the international division of labour.One institutional factor which had an impact on industrial organization was the gradualphasing out of State protectionism. In Switzerland, the watch cartel was steadily dismantledbetween 1961 and 1965, under pressure from the largest watch companies. They wanted todevelop and rationalize their means of production (M&As in Switzerland and relocation toAsia) in order to cut production costs and boost their ability to compete with American andJapanese companies, whose large-scale organizational structures enabled them to marketcheaper products.23 Moreover, the United States and European nations gradually abandonedtheir protectionist customs policies during this decade.24 Consequently, the enterprises of the22

worlds leading watch nations began to face growing competition while gaining newopportunities for expansion.As for technological factors, they mainly consisted of the implementation of mass productionsystems for watchmaking. They were developed in the late 1950s and spread in the 1960s,through various process innovations, such as automation of movement production. However,final assembly remained difficult to automate. These new production technologies enabledcompanies to plan rationalization, realize economies of scale and ramp up production, all ofwhich were essential push factors driving foreign expansion.These changes in the institutional and technological environment led to a first wave of FDIwhich affected all of the watchmaking nations. Four cases may be singled out. First, areference must be made to the emergence of the first real MNE in the watch business, withTimex, whose production amounted to 8 million pieces in 1960 and 22 million in 1969, that is,more than the overall volume of American production for that year (estimated at 19 millionpieces). 25 However, Timex production data for the period included not only watchesmanufactured in the United States but also those manufactured in all of its factoriesworldwide. In 1971, it employed a total of 7,000 persons and its main production centresabroad were based in Hong Kong and Taiwan for Asia, as well as in Scotland (Dundee),Britain (Feltham), France (Besanon), Germany (Pforzheim) and Portugal (Chaneca daCaparica) for Europe.26 These plants mainly produced watches for domestic markets, exceptthose in Hong Kong and Taiwan, which supplied all Asian markets.Second, the major Swiss watch companies moved to relocate production abroad. This wasparticularly the case of the company Ebauches SA, created in 1926 to control the productionof movement blanks, which attempted to extend its activities in Europe by successivelyChronos, 2004 (especially Chapter 4 on the watch war").25Kokusai tokei tsushin, 1970, p. 477 and estimates of the Federation of the Swiss Watch Industry published byLandes David S., Revolution in Time: Clocks and the Making of the Modern World, Cambridge: HarvardUniversity Press, 2000 (second edition), p. 423.26Blanc Jean-Franois, Suisse-Hong Kong, le dfi horloger. Innovation technologique et division internationaledu travail, Lausanne : d. dEn bas, 1988, p. 45 and LImpartial, 10 November 1971.

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purchasing two movement blank firms: Durowe in Germany (1965) and SEFEA in France(1967).27 In addition, the financial entreprise Chronos Holding, founded in 1966 by theASUAG trust (which controlled Ebauches SA in particular), the Federation of the SwissWatch Industry and seven banks took a 19.9% stake in the capital of Gruen Industries in theUnited States (1967).28 Yet the foreign expansion of Swiss companies was still limited, asrationalization was first implemented domestically.Third, Hong Kong emerged as a major venue for the production of parts and the assembly ofwatches for Swiss, American and Japanese companies.29 While the technology of automatedmass production was possible for watch movements realized at the time in high-techEuropean, American and Japanese plants activities relating to the production of externalparts (cases, straps and dials) and final assembly were relocated to cheap labour regions,mainly in Hong Kong. As a result, the Federation of the Swiss Watch Industry intervened toimprove the quality of parts made in Hong Kong. For example, in 1966 it signed a technicalassistance agreement with the Federation of Hong Kong Industries.30 Subsequently, the majorSwiss watch groups invested directly in the British colony. They opened subsidiaries, such asSwiss Watch Case Center (1968) or Swiss Time Hong Kong (1969), and entered into jointventures with industrialists and traders established in Hong Kong, like Swiss Plating Co.(1968) and Swikong Manufacturing (1971).31 Hong Kong became a key supplier for theSwiss watch industry. While Swiss imports of cases jumped from 1.6 million pieces in 1961to 8 million in 1970, Hong Kongs share was growing fast: 21.9% in 1961 and 60.8% by1970.32 The proportion of Swiss watches equipped with foreign cases rose from 3.3% in 196027

to 15.3% in 1973 (see figure 3). As for the Japanese watch companies, even if they did notinvest directly in Hong Kong at the time, they also relied on it as a major parts supplier. Thevalue of Japanese imports of watch parts from Hong Kong soared, rising from 141,000 yen in1960 to 34.8 million in 1970 and 1.3 billion by 1980.33

As for the assembly of watches, it led in particular to the opening of a subsidiary of theAmerican company Timex Corporation, which founded Timex Hong Kong Ltd. in 1967.34Next, the Japanese group Hattori & Co. set up a production subsidiary, Precision Engineering(1968).35 Yet Swiss watchmakers were not absent. For low-range models (pin-lever watch),Kongs strategic importance as a supplier of cases decreased in favour of Thailand (1970s-1990s) and China(since 2000).33Nihon gaikoku boeki tokei, Tokyo: Ministry of Finance, 19601980.34Tokei no honkon shijo chosa hokokusho, Tokyo: Nihon kikai zushutsu kumiai, 1980, p. 4.35Seiko gurupu no kaigai senryaku, Noryoku kaihatsu shirizu, vol. 87, 1982, pp. 14-15.

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for example, there was the company opened by one of the biggest watch companies inSwitzerland, Baumgartner Frres Granges, BFG Far East (1970).36Thus, an industry based on outsourcing developed in Hong Kong during the 1960s. Thenumber of enterprises active in watchmaking in the city jumped from 61 in 1960 to 229 in1970. 37 Most were SMEs specialized in subcontracting and dependent on foreign bigbusiness.Four, inward FDI in Switzerland developed, but almost exclusively in American firms.Bulova bought up two manufactures, Recta (1963) and Universal (1966), while Hamiltonpurchased Bren Watch (1966) and Benrus took a minority interest in Ulysse Nardin (1965).38For these companies, the objective was to enlarge their production facilities of high-qualitymechanical watches for the American market, as a result of which such FDI followed a logicconsistent with the strategy developed at the beginning of the 20th century.Accordingly, the first wave of FDI which could be observed worldwide in the watch industryduring the 1960s led to an initial phase of international division of labour. This new industrialorganizational structure was characterized by a strong hierarchy, with decision centres in theUS and Switzerland and production subsidiaries embedded in a relationship of dependency,aimed at either horizontal extension of production, as in Europe, or vertical division of labour,as in Hong Kong. The organization of the largest firms tended to transcend nationalboundaries, but their management and ownership were still very much locally anchored.

3. The impact of electronics (1970-1985)

The most important changes occurred in the years 1970-1985, a period during which the localroots of the watch industry declined in favour of new actors. However, this sea change was363738

Blanc, Suisse-Hong Kong, p.148.

not consistent with the first phase of internationalization seen in the 1960s; rather, it marked amajor break.These years are usually known as the period of the quartz revolution39, a phenomenonwhich has been a focus of scholars attention. Nevertheless, a second major development, ofan institutional nature, which was of course less visible and less spectacular, also contributedto this radical change: the collapse of the Bretton Woods system after 1971 and the transitionto a system of floating exchange rates. This revamping of the monetary system had asignificant impact, as it considerably strengthened the value of the Swiss franc against the USdollar, especially in comparison with the Japanese yen, which remained relatively low untilthe Plaza Agreement (see figure 4). This monetary dimension underscored the lack ofcompetitiveness of Swiss watch companies in relation to their Japanese rivals, encouragingthe former to pursue rationalization and relocation in East Asia.

Yet technology was the change which had the greatest impact, in the form of the advent ofquartz watches. This product innovation had various effects on industrial organization aroundthe world. One major consequence was that it put an end to the first wave ofinternationalization which had begun in the 1960s and had relied essentially on the expansionof low-range watch producers. The development of quartz watches made it possible to marketcheaper, more precise products than pin-lever watches, which completely lost their advantage.Two of the worlds leading watchmakers, who had been key drivers of the internationaldivision of labour, left the watch business. The Swiss firm Baumgartner Frres Granges(BFG) went into recession in 1975 and closed down in 1982.40 As for Timex, it closed nearlyall its foreign plants in the second half of the 1970s and converted to subcontractingproduction outside watchmaking.41The other American firms which played an essential role in internationalization also4041

LImpartial, 9 September 1982.

Timex, in International Directory of Company Histories, pp. 479482.

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experienced difficulties due to quartz watches. Bulova and Hamilton found themselves facingunsolvable problems as a result of disastrous technical choices the diapason watch forBulova and the electrical watch for Hamilton. The watch division of the Hamilton group waspurchased in 1974 by the Socit suisse pour lindustrie horlogre (SSIH, a group founded in1930, including in particular the watch companies Omega and Tissot), who wanted to acquireHamiltons retail network in the United States.42 As for Bulova, it was taken over in 1976 byStelux (see below) and sold a few years later to Loewe (1979). Its production centres inAmerica (1978) and Switzerland (1982) were shut down.43In Switzerland, this period of major changes is usually called the watch crisis (crisehorlogre in French). Indeed, the volume of exports went from 24.2 million pieces in 1950 to40.9 million in 1960 and peaked at 84.4 million in 1974, before dropping to an annual averageof 31.3 million in 19821984.44 As for the number of workers, it decreased from some90,000 employees in 1970 to less than 47,000 in 1980.45 During this decade of recession, theSwiss watch industry experienced extensive restructuring, the most well-known instancebeing the merger in 1983 of the SSIH and the trust which controlled the production ofmovements and parts, ASUAG, giving birth to a new company, the Socit suisse demicrolectronique et dhorlogerie (SMH, Swatch Group since 1998), on the advice of theconsultant Nicolas G. Hayek. Industrial rationalization also led to the closure of manyenterprises, with the number of firms in the watch business declining sharply from 1,618 in1970 to 634 in 1985.46 Nevertheless, foreign companies did not take advantage of this crisisto pour inward FDI into Switzerland: American firms left Switzerland and were not replacedby newcomers.Only one major firm invested in Switzerland during this period: Stelux. This company was42

listed on the Hong Kong stock exchange in 1972 and adopted a very active strategy ofinternational expansion in the 1970s.47 This began in 1975 with the purchase of several smallSwiss companies, all producing external parts: the firms Metalem SA (dials), Jean Vallon SA(cases) and Orac SA (cases), grouped together in a Bienne-based holding company, UniluxSA.48 The objective of these acquisitions was to develop skills and know-how in the field ofwatch design.However, Stelux aimed not only to specialize in external part making, but also to develop itsexpertise in the assembly of movements and electronic watches and in marketing. Accordingly,it opened Stelux SA in Switzerland (1975) and took a 27% stake in Bulova Watch Co.,becoming the largest shareholder of the biggest American watch company (1976).49 Byacquiring this world-famous company at a time when it faced severe financial difficulties,Stelux intended to gain access to Bulovas dense network of retailers in the United States.50Subsequently, in the second half of the 1970s, Selux engaged in the assembly of electronicmovements. For example, in 1978 it signed a major contract with the Swiss companyEbauches Electronique Marin SA (EEM), for assembling electronic movements in HongKong intended for the American market.51 In this way, Stelux aimed to control the entirevalue chain for this product, from the production of parts to the sale of watches.During the following decades, boosted by its experience in watch design and the assembly ofelectronic movements, Stelux developed its commercial business of complete watchesthrough its various brands. Three elements are worthy of note as far as this repositioningstrategy is concerned. First, Stelux restructured its production system, with the sale of Swiss

47

Journal de Genve, 15 June 1976.

Journal de Genve, 10 December 1975.49Journal de Genve, 15 June 1976.50Despite this takeover, the Swiss production susbidiary of Bulova was closed down in 1976 and the Bulovabrand was never used by Stelux. It was purchased by Citizen Watch Co. in 2006. Marti Laurence, "Retour surune grve dite exemplaire. La grve de Bulova Watch Co., Neuchtel, 1976, in Rosende, Magdalena andBenelli, Natalie (eds), Laboratoires du travail, Lausanne: Antipodes, 2008, pp. 39-52.51LImpartial, 16 February 1982.48

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external part making companies (1979). 52 In addition, it relocated its Asian productionfacilities to mainland China, as a subsidiary of Stelux Watch (Hong Kong) Ltd. Finally, in1988, it purchased an old watch manufacture in Switzerland, the company Montres UniversalSA, at Geneva, to gain a workshop for the production of Swiss Made watches. 53Incidentally, this was not only a production issue but also an integral part of the newmarketing strategy of Stelux.The Swiss watch companies primarily pursued the international division of labour to securethe supply of external parts. The largest groups strengthened their commitment to Asia, likeSSIH which in 1971 purchased in Swiss Time Hong Kong, founded two years previously by acouple of Swiss entrepreneurs.54 In 1978, SSIH opened a second case-making plant, inSingapore, Precision Watchcase Ltd., in a joint venture with Japanese industrialists.55 Inaddition, the Swiss federal government slashed customs duties for imports of Hong Kong andSingapore manufactured goods by 30%, thereby encouraging the relocation of partsmanufacturing to these countries.56 SMEs also followed this strategy, in particular casemakers, who opened production subsidiaries in Asia in the 1970s. This was for example thecase of Henri Paratte & Cie, who opened Parathai in Bangkok (1972), and Ruedin SA, whotook a stake in Swisstime Philippines Inc. (1978).57 Consequently, the share of Swiss watchesequipped with foreign cases increased sharply during this period (see figure 3).However, the relocation of production by Swiss companies was limited by the adoption of afederal decree on the use of the Swiss Made label, which obliged Swiss companies tomaintain some production activities in Switzerland primarily the production of at least half

of all movement parts (value) and the final assembly to qualify for this label.58 This was avery pragmatic measure, aimed at reaping the benefits of the advantages of both theinternational division of labour for low value-added activities and the prestige linked to theSwiss Made label. For enterprises located in Switzerland, this was the beginning of a newkind of location advantage.East Asia was the main region to take advantage of changes resulting from the advent ofelectronics, but the situation differed considerably between Japan and Hong Kong, contrary towhat is usually stressed in literature. During this period, Japan carved out a position as the No.1 watchmaking nation, and the watch industry was still firmly rooted in the national territory.The Japanese watch industry did not include any firms with foreign capital, and the bulk ofthe production was realized domestically. Like their Swiss rivals, Japanese watch companiesrelocated some parts production abroad, mostly in Hong Kong and Taiwan (see table 3).These were essentially external parts imported for Japanese plants. The implementation ofautomated mass production in Japanese watch companies led to highly integrated systems,which were difficult to partially relocate.

Table 3: Japanese import of watch movements and parts from East Asia, 1960-19801960

The Hong Kong watch industry experienced a boom within this new technological context.The assembly, then the production, of analog quartz watches began in 1975, followed bydigital watches (LCD and LED displays) the following year. Market share gains came atlightning speed: by 1976, Hong Kongs domestic production of four million quartz watcheshad made it the second largest producer in the world (volume), behind Japan (7.3 million).59The shift to electronic watches was very fast: they already accounted for 68.3% of the totalvalue of Hong Kongs watch exports in 1980, then 88.2% in 1985 and 94.8% by 1990.60Above all, electronic watches made it possible for Hong Kong to establish itself as a leadingwatch nation. The total value of its watch and clock exports was USD 285.8 million in 1975,USD 1.6 billion in 1980 and USD 3.8 billion in 1990 (see table 2).The industrial structure of the watch business also underwent a dramatic change. Quartzwatches indeed enabled Hong Kongs entrepreneurs to overcome their technologicaldependency on traditional watch nations. Between 1974 and 1978, the workforce wasdramatically redeployed to new sectors (see table 3). The proportion of employees incompanies with foreign capital dropped from 49% in 1974 to 25% in 1978, while the overallsize of the workforce remained stable. The emergence of newcomers weakened the position offoreign firms and reinforced the national character of this industry. Assembling electronicmovements with imported components in Hong Kong and exporting finished watches to theworld market became the new business model of this industry.For Hong Kong watch companies, the shift to electronics let them free themselves from theirhistorical dependency on large foreign watch firms. They were still dependent on externalpartners for the supply of CMOS chips and digital displays (LED, LCD). Yet these supplierswere not watch companies, but rather electronic components makers (Oki Electric, NEC,Intersil, Litronix, etc.)61 Beyond technological issues, electronic watches played a key role in596061

the emergence of Hong Kongs watchmakers because they gave them direct access to markets,something they did not hitherto have. Marketing and distributions skills were acquiredrelatively quickly. In 1987, Hong Kong watch companies were represented for the first time atthe Basel Fair, the largest watch distribution event in the world.62

4. A new basis for competitiveness: global supply chains (since 1985)

Organizational changes in the world watch industry in 1970-1985 led to the emergence ofglobal rather than national production systems. Two main models predominated.First came a new generation of MNEs with production facilities organized globally. Theirnumbers were very low, as they essentially consisted of Swatch Group (Switzerland) and theJapanese companies Seiko, Citizen and Casio. Founded in 1983 through the merger of the twolargest Swiss watch groups (SSIH and ASUAG), Swatch Group engaged during the secondhalf of the 1980s in intense rationalization of production to restore its cost-competitivenesswith its Japanese rivals.63 This strategy was marked by the opening of production subsidiariesin Thailand (1986), Malaysia (1991) and China (1996). Consequently, the number ofemployees in Switzerland dropped from about 80% in 1983-1985 to 71% in 1990 and 54% in1998. Besides, the production of these Asian plants was intended to supply not only SwatchGroups assembly plants in Switzerland as well as other Swiss companies depending on theGroups supplies but also world markets for electronic watch movements. During2000-2004, overall Swatch Group production of Swatch Group averaged 120 million pieces(watches and movements), that is, some 20-30 million Swiss Made pieces (the level ofSwiss exports at that time) and 90-100 million non-Swiss pieces.64 The latter were primarilyquartz movements sold to assembly makers outside Switzerland, mainly based in Hong Kongand China, who designed watches for a large variety of customers (OEM makers).626364

LImpartial, 2 February 2000.

The Japanese watch companies show a similar profile and became global MNEs in the1980s.65 The case of Seiko is very representative of this transformation. This group adopted astrategy of relocating assembly and production in Asia, especially China, in order to cut costs.In 1988, the subsidiary of Seiko Instruments Inc. (SII) in Hong Kong, Precision EngineeringLtd. (founded in 1968) began outsourcing the assembly of electronic watches to a newcompany founded in Guangzhou, Seiko Instruments (Whampoa) Factory. A second companywas opened in 1996 in Shenzhen (Sai Lai Factory), then all SIH production on Chinese soilwas restructured in the late 2000s and centralized at a new plant in Guangzhou (2012). Inaddition, SII headquarters in Japan also opened some directly controlled productionsubsidiaries, in Thailand (1988), China (Dailan SII, 1989), Malaysia (1990) and South Korea(2004).66

Figure 5: Global production of Japanese watch companies and proportion of production in

As a result of this reorganization of the watchmaking production system, a growing share of

watches and movements were manufactured outside Japan. This proportion increasedsignificantly over time, rising from 17.8% in 1995 to 24.2% in 2000 and 45.8% in 2010 (seefigure 5).67 Thus, in 2009-2010, nearly one out of two Japanese watches was made outsideJapan. A second major effect of this radical change was that production volumes remainedstable. Whereas production in Japan tended to decrease since 1998, the overall output ofJapanese watch companies stayed more or less the same, despite the 2009 drop due to theworld financial crisis, amounting to some 700 million pieces.Second, a new organizational model appeared in the 1980s: global supply chains, with HongKong at their centre. The acquisition of competences in watch design during the 1960s,through the outsourcing of production of external parts for Swiss, American and Japanesewatch companies, easy access to quartz movements and proximity to low-costlabour-intensive production facilities in China where they transferred their plants in the1990s are all elements which enabled Hong Kong entrepreneurs to position themselves asindispensable intermediaries in the manufacturing of watches under license. 68 Whereasheadquarters, together with product design and marketing, stayed in Hong Kong, theproduction and assembly of watches were gradually transferred to the economic zone ofShenzhen and to Dongguan, both located in Guangdong province. However, these Chineseplants did not supply all the movements used by Hong Kong watch companies, which alsopurchased Swiss or Japanese movements, depending on their customers wishes.69 As a result,some of them invested in Europe in order to control their supply in watch movements, such asWellgain Precision Products Ltd., which took a 50% interest in France EbauchesMicrotechniques (2000),70 or Chung Nam Watch Co., which acquired the movement maker

ISA, Technotime, as well as the Swiss brand Roamer Watch (1994).71 Consequently, thedomestic production of watches entered a phase of decline. After peaking at HK$ 13.5 billionin 1990, it amounted to only 7.4 billion by 1993.72

Until the mid-1980s, the growth of Hong Kong watch exports relied on the domesticproduction and assembly of finished watches. The share of re-exports out of overall exports,which was very high when Hong Kong was essentially a commercial hub (89.9% in 1960;86% in 1965), declined dramatically from its 1970 total of 50.8%, amounting to 17.8% in1980 and 18.9% by 1985. Yet during the second half of the 1980s, Hong Kong watchcompanies began to relocate production facilities to China. This transfer ended in the late1990s and resulted in a very high growth of re-exports from Hong Kong, which rose from36.1% in 1990 to 75.5% by 1995 and have stood at more than 90% since 2000. On the whole,7172

Trueb, The World of Watches, 2005, p. 364.

however, these were no longer essentially watches re-exported to the entire Far East by Swiss,Japanese and American firms, as used to be the case until the 1970s, but rather productsmanufactured in China. Watch imports from China grew by leaps and bounds: USD 49.9million USD in 1980, 885.5 million in 1990, 3.95 billion in 2000, and 7.43 billion in 2010).73While the value of these imports accounted for only 17.4% of re-exports in 1980, theyamounted to 63.9% in 1990 and have represented more than 75% since 2000.Yet the repositioning of enterprises within global value chains was not a natural change. Thenew conditions of competitiveness it offered had various effects on firms. Some of themmanaged to adapt quite well to this new kind of organization, like Dailywin (1988), CrystalElectronic (1997), and Gordon C (1997), which gradually relocated their production centres toChina. 74 Others were unable to restructure and disappeared (Betatronic, 1990; LarnolEnterprises, 1992; Beltime, 1995; Tinic Watch, 2002; etc.).75 Finally, newcomers arrived,who took advantage of this opportunity to gain a foothold on the world market. For example,this was the case with Renley Watch Manufacturing, founded in 1983 by Stanley Lau, whichis headquartered in Hong Kong and has production centres in China and Switzerland.76During this period, foreign entrepreneurs also settled in Hong Kong, such as the SwissJacques Froidevaux, who created the company Jacques Farel Ltd. (1984),77 or the Americangroup Fossil, founded in 1984, which possesses a subsidiary in Hong Kong for purchasingwatches from some twenty local manufacturers and, since 2001, a company in Switzerland forSwiss Made watches (Montres Zodiac SA).78 Lastly, these companies engaged in not onlyproduction but also marketing. Most of them specialized in private label, distribution andretailing. This is why several of them purchased Swiss brands, such as Asia CommercialHoldings Ltd., which took over Juvenia (1988), and Renley Watch, which bought up Le Phare737475767778

Jean dEve and Sultana (1991).79

However, even though some Hong Kong watch entrepreneurs distribute watches bearing theirown brands, the key driver of their success has been OEM manufacturing activities. Theysupply several of the worlds top 20 watch companies, such as Fossil (USA), Moretallo &Sector (Italy) and Folli Follie (Greece). Beyond these few examples, there is the fashionindustry in general (Benetton, Burberry, Puma, Tommy Hilfiger, etc.), which has madewatches key components of its diversification strategy since the 1990s80 and usually sourcesits supplies from Hong Kong watch companies, sometimes through marketing and designcompanies based in Switzerland.

5. The importance of being Swiss

In the context of an industry which has globalized intensively since the late 1980s, one mustwonder what place Switzerland occupies and why watch production is still strongly anchoredin the country. Since 2000, Switzerland has established itself as the unchallenged No. 1 exportnation, with the value of watch exports rising from USD 5.6 billion in 2000 to 14.7 billion in2010, while Hong Kong has stagnated at an average of USD 6 billion during this decade (seefigure 1). What is more, in 2012 Switzerland was home to many of the companies in the top20: nine have their headquarters in the country, while eight others have production facilitieson Swiss soil.Switzerlands key role in the global watch industry is the consequence of an institutionalfactor which turned into a marketing resource during the 1990s, the Swiss Made legislation.At the time of its implementation in 1971, this measure designed to compensate forliberalization was aimed at keeping part of the production of Swiss watch movements inSwitzerland to ensure their quality. At the time, the industry was dominated by mechanical79

watches (99.6% of Swiss watches exported in 1970)81 and it was felt that only production inSwitzerland was likely to maintain an image for good quality and thus a good reputation in the minds of business and political elites.Yet the Swiss watch industry experienced a shift towards luxury in the 1990s, characterizedby a decrease in the volume of watches exported and a steep rise in their value. After reachinga new peak of 50.9 million pieces in 1993, the volume of watch exports plummeted to 35.9million pieces in 2000 and 31.9 million in 2010.82 During this same period, however, thevalue of mechanical watches became the key driver for growth. Between 2000 and 2010,mechanical watches went from 9.7% to 19.7% of the volume of exports, but from 47.5% to71.9% in terms of value.83 These changes in the nature of products reflect the radical shift intheir use. Swiss watches are no longer useful objects bought for their precision; rather, theyhave morphed into luxury fashion accessories which convey an image of tradition, excellenceand authenticity.84In this context, the meaning of the Swiss Made legislation changed even if its content is stillthe same. Indeed, it no longer aims to maintain product quality, which can be easily achievedelsewhere in the world, but rather to guarantee the truthfulness of an essential marketingresource. Thus, the objective of possessing luxury brands in their brand portfolios has lednumerous foreign watch companies to invest in Switzerland since the late 1990s, like theFrench luxury group Mot Hennessy Louis Vuitton (LVMH), which took over TAG Heuerand Znith (1999); Fossil (USA), which bought up Zodiac (2001); Festina (Spain), whichpurchased Candino (2002); and more recently Citizen Watch (Japan), which acquired threeSMEs specialized in part making (2012); and China Haidan (Hong Kong), which successively81

acquired Eterna (2011) and Corum (2012).85 Moreover, the largest Swiss companies havealso been sourcing movements from China for designing cheap fashion watches under licensesince 2000. For example, Swatch Group actively launched out in this new business in 2005through its subsidiary Endura, specialized in OEM watches equipped with either Swiss orAsian movements regarding the customers needs which primarily developed watches forthe Spanish apparel company Mango, the American shoemaker Timberland and the Japanesesportswear firm ASICS. 86 As for Richemont, in 2006 it took a 10% interest inEgana-Goldpfeil (Hong Kong), a firm specialized in licensed production of fashion watches.

ConclusionThis paper has emphasized the profound organizational change which occurred in the watchindustry between 1950 and 2010, characterized by a shift from nation-based competition to aglobalized industry. Yet this change was not a linear and natural process; rather, it resultedfrom a radical change in two kinds of factors technological and institutional.Two types of technological factors led to a global industrial organization. First, processinnovation, with the mass production of low-range mechanical watches in the 1960s, madepossible a first phase of relocation very similar to the classical model of the mechanicalindustry in the late 19th century, as embodied by Singer Manufacturing Company.87 Thecompanies Timex (USA) and BFG (Switzerland) restructured internationally and becamemajor players in this industry thanks to their organizational capabilities. Yet this first phase ofinternationalization ended in failure, because it was predicated upon a product without afuture.Second, there was the key impact of electronics and quartz watches, developed in the second

85

Le Temps, 11 October 2001, 18 January 2002, 2 July 2011, 6 March 2012 and 25 April 2013.Le Temps, 27 January 2006.87Davies Robert, Peacefully Working to Conquer the World: Singer sewing machines in foreignmarkets, 1854-1920, New York: Arno Press, 1976.86

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half of the 1960s and mass produced from the late 1970s onwards. This product innovationenabled any entrepreneur to acquire watch movements with ease: they suddenly becameaccessible and extremely cheap. Since then, their production has gradually been concentratedin cheap labour areas, especially in South-East Asia, then in China since the 1990s, which hasmade Hong Kong entrepreneurs indispensable intermediaries and suppliers of watches fornearly the entire world market except for the so-called Swiss Made watches.As for institutional factors, these were essentially legal measures restricting FDI andrelocation, like the Swiss watch cartel or customs protectionism in Japan and the UnitedStates. Yet these measures were largely abandoned in the 1960s, allowing firms to restructureinternationally. Even the Swiss Made legislation was a very pragmatic measure which hasenabled semi-globalization of the production of watches by Swiss companies since the 1970s.Beyond these technological and institutional changes, the major shift in the nature of theproduct itself must be stressed. The advent of electronics and social change has given way tonew uses for watches since the late 1980s: they have stopped being useful objects bought andcarried for their precision and have become fashion accessories, either cheap (Hong Kongmade) or luxurious (Swiss made). Within this paradigm shift, brand management has emergedas the key factor for success on world markets, and international competitiveness has reliedsince the 1990s on the ability to build and manage a brand portfolio. Nevertheless, despite thismajor change, territorial anchorage and regional roots remain important. The emergence ofglobal supply chains does not mean that the world has become flat. On the contrary,Switzerland and Hong Kong appear as major nodes within these networks, even if design,production and marketing are increasingly dissociated, as can be seen in other industries liketextile and fashion.88